Credit Score Affects Your Rate
How much of a difference can my credit score make in the interest rate I can get on my mortgage? What's considered a good score?
Your credit score can make a giant difference in your rate.
There are several types of credit scores, but most mortgage lenders use the FICO score to determine your credit risk. The median FICO score is 723, with most lenders requiring a score of at least 760 to get the best rates (the highest score is 850, but only 13% of people's scores beats 800).
Having a high score can save you thousands of dollars each year. A person with a FICO score of 760 or better currently can qualify for an average interest rate of 5.98% on a 30-year fixed-rate mortgage. The average rate rises to 7.47%, however, for people with FICO scores of 620 to 639, according to Fair Isaac, the company that created the FICO scores. That translates into a higher payment of $227 each month, or $2,724 per year on a $216,000 mortgage.
And you'll take an even bigger hit if your score drops below 620. At that point, lenders often throw you into the subprime category, "which will increase your rate appreciably -- as much as 3% to 6% over someone with a better credit score," says Bob Walters, chief economist for Quicken Loans. Visit Fair Isaac's MyFico Web site for more details about how your score can affect your rate.
Your score can make an even bigger difference in the interest rates on home-equity lines of credit. Walters says those rates tend to fall into 20 or 30 point buckets -- where the interest rate for someone with a 670 score may be half a point higher than one with a 700, for example.
Your credit score also affects the rate you pay for private mortgage insurance, the amount of documentation your lender requires when you apply for a loan, the size of your down payment, the type of loan you can get, and the size of the loan. "Often times, if a client doesn't have a certain threshold score, say 700 or 660, they won't be able to borrow as much as someone who does have that score," says Walters.
Just a few points can make a huge difference Some programs have a 700 cut-off, and you won't qualify with a 697 score -- no matter how good the rest of your file looks. "There are times when borrowers have a score that is only a few points under a given threshold score, and they pay a higher rate than does someone else with a score that is only two points higher," says Walters.
For tips on improving your score, see MyFico.com.
Got a question? Ask Kim at firstname.lastname@example.org.